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Analysis & Opinion
29.12.09 Back In Small Business?
By Rose Griffin

The Russian government is implementing a range of anti-crisis measures designed to help the economy. But when can small and medium enterprises (SMEs) expect to reap the benefits of this support? SMEs account for 20 percent of Russia’s GDP, but despite their cry for help, the government has often focused on larger enterprises. It remains to be seen whether the limited support measures will be enough to help SMEs survive until finance from commercial banks becomes available.

At the beginning of the financial crisis, the Russian government prioritized shoring up large companies which account for the majority of Russia’s GDP and provide the most jobs. “When the crisis first hit, a lot of effort was made to support major business because that’s where the jobs are. The first thought was to help large enterprises that employ practically entire cities, and little attention was paid to SMEs,” said Laura Brank, a managing partner at Dechert Russia law firm. But “once people had had time to think, there was recognition that those businesses are a dying breed and more should be done to support SMEs,” she said.

Now, SMEs are a priority for the government and there has been a shift in emphasis, said Sergei Krjukov, the chairman of the board at the Russian Bank for Development, part of Vnesheconombank (VEB). “Small businesses are very important; they have innovative ideas but often lack the resources to implement them. They may have no assets, no credit rating. We think that these companies should be supported by our program,” he said, speaking at the Adam Smith Russian Banking Forum held in London in December.

The state sponsored program is available to SMEs through two channels – from the federal budget and from regional budgets. Special bureaus are being introduced which support SMEs in law and also in practice through regional governments, said Brank. The government assistance program takes various forms, including loans, provisions for leasing equipment, and support with transport equipment and costs. Loans available to SMEs through the program start at 7,000 rubles with an upper limit of 60 million rubles and last for 2 to 3 years. “If we look at the development of the production facilities of SMEs, the main expenditure is property and essential equipment,” said Krjukov. Although many important pieces of equipment are not expensive or difficult to operate, they still remain beyond the budget of many SMEs.

The whole SME support program will be implemented by VEB, working through regional bank partners. Priority is given to SMEs with the potential to provide the most jobs and have the biggest impact on a region’s GDP growth. Regional banks are only eligible to lend as part of the program if at least one agency has given them a rating.

The government measures have enjoyed success. “Generally the situation has improved compared to five, ten years ago. It is an objective of the highest institutions, the president and the government, to take care of small businesses,” said Hubert Pandza, Member of the Supervisory Board of TransCreditBank.

However, there is consensus that more needs to be done as many problems remain. Larger businesses are, for instance, draining resources from SMEs. “A year and a half ago the larger companies were receiving hard currency loans from foreign banks, even some medium-large companies were obtaining such loans,” said Brank. As a result, large enterprises struggle to acquire financial support from foreign banks and therefore need more government backing than before, which comes at the expense of SME support.

One of the main problems facing SMEs is the disparity between the support available in major cities and the provinces. Access to resources is most readily available in certain hotspots in Russia that already have a large number of SMEs, support organizations and effective regional government. “Moscow and Tatarstan are leading the way; they have a good structure of support for SMEs in place. This should be duplicated in other regions,” said Krjukov.

“I would assume that it is more challenging outside Moscow or St. Petersburg,” said Pandza, “outside the major cities you are probably required to do more for yourself, to take more initiative.” Brank agreed but said it was still hard in the big cities. “By and large Moscow and St Petersburg appear to be doing more, but they also have more SMEs to support,” said Brank.

Government measures to support SMEs are improving the overall business climate, but companies continue to battle with a number of barriers to survival and further growth. “What is probably ongoing is the fight with bureaucracy, the fight against corruption and of course the fight for financing. These probably have been, still are and will remain the three major issues facing SMEs,” said Pandza.

Finance available to SMEs is currently provided almost exclusively by VEB and it seems unlikely that commercial banks will start lending to SMEs in the near future. Banks continue to feel nervous about borrowers’ ability to repay loans, while a large majority of their loan allocations has gone to support large companies. Brank said the situation would not improve for SMEs, until it does for larger companies. “Unfortunately SMEs will most likely only start to do better as more cash goes to larger enterprises,” she said. “One reason the US economy is coming out of recession is the increasing strength of SMEs. In Russia, they account for such a small percentage that they can’t move the market or create new jobs in the same manner.”

In spite of government efforts to cut bureaucracy, there is still little distinction between the laws that apply to small businesses and large businesses. “I still don’t think it’s easy enough for SMEs to deal with Russian bureaucracy. I wouldn’t say that they’re having no impact at all, but there’s still a way to go, it simply needs more time,” said Brank.
One gets the overwhelming feeling that more needs to be done, which begs the question: what long-term impact will the crisis have on SMEs? When conditions improve and access to finance increases, will Russia manage to develop a strong SME sector? Krjukov said that providing effective support to innovation-based companies is crucial if Russia is to achieve this. “Current issues such as nonperforming loans and lack of capital are drawing a lot of resources away from innovation-based companies. We really need to overcome this,” he concluded.
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